rsETH Security Incident Raises Risk of DeFi Liquidation Cascade, Spark's monetsupply.eth Warns

Odaily Planet Daily reports that monetsupply.eth, Strategic Lead at Spark Protocol, said on X that tightening stablecoin liquidity could push the ongoing rsETH incident into a more hazardous phase. He estimated that roughly 16.5% of the ETH market is backed by rsETH. If losses are spread evenly across mainnet and cross-chain venues, rsETH loans in eMode could see a 10%15% haircut. Even after risk buffers are used up, ETH depositors could still face residual losses of 2%3%. Under those assumptions, ETH suppliers may rush to exit, driving utilization to 100% and effectively locking markets. Borrowing rates, he added, may still be too low to force leveraged positions such as wstETH and weETH to deleverage and free up liquidity. With ETH withdrawals constrained, borrowers who took stablecoins like USDT against ETH collateral may be unable to close positions in time, even as stablecoin lending rates rise, leaving prior incentive structures disrupted. monetsupply.eth warned that a fully utilized, "locked" DeFi market could trigger cascading liquidations and two major incentive distortions. First, ETH holders would be unable to adjust collateral ratios, while liquidators could be unable to withdraw and sell collateral; a drop in ETH prices could quickly translate into mounting bad debt. Second, stablecoin depositors could be incentivized to "exit" by borrowing other stablecoins, cheaply securing about 75% of their potential capital recovery while positive yields persist. For lending markets that depend on liquidity pools and re-collateralization, he said liquidity must take priority. He also noted that Aave's recent reduction of the maximum borrowing-rate cap (slope2) is weakening deleveraging incentives and materially increasing systemic failure risk.